MAJA SMITH: Build solid relations with suppliers so lean times are still fruitful

As we start emerging from the pandemic — standing up and dusting ourselves off, peering around cautiously to see what is left — one thing is clear: the world pre-Covid-19 is gone.

That’s certainly true of the automotive industry, which in many ways took its success for granted since the first Ford Model-T rolled off the production line back in 1908. Since then, though continuously evolving, the industry became fat and lazy. The emergence of Tesla at the forefront of the battery electric vehicle (BEV) revolution certainly shook things up in recent times, but as with all monolithic industries, change is slow. Until Covid-19, that is.

Suddenly there were no parts to build cars and the over-reliance on suppliers — which since the 1970s had strived to deliver just-in-time (JIT) — exposed huge gaps in an industry that had for decades been able to weather all storms. The prevailing economic theory of free market competition leading to lower prices, higher quality products and ultimately a better deal for customers has a few serious gaps, which the pandemic exposed. Enter the semiconductor shortages, in which automotive companies globally were bypassed in favour of the burgeoning consumer electronics industry. As a consumer, you could buy a phone but you couldn’t buy a new car.

The automotive sector, like other large industries, has been built on sourcing the cheapest parts — labour as well as raw materials — globally, leaning heavily on certain suppliers and certain low-cost production countries. But when the world comes to a standstill it’s every human for themselves. I’ve seen thousands of “cars on wheels” over the last year: vehicles built but missing a key component — in our case, semiconductors. These cars need to make their way back onto the assembly line once the missing part arrives, which is both inefficient and less than ideal from a quality control point of view.

What we had come to rely on as the smart way to do business turned out to be surprisingly fragile. JIT supply and global sourcing have done nothing but frustrate consumers and put many businesses, including car dealerships, into liquidation.

So, guess what we do? We go back in time, doing exactly what we did before, but we give it a fancy new name: vertical supply chain integration. According to the New York Times, “Henry Ford was tormented by the possibility of running out of parts and raw materials.” He bought coal mines all over the US — and railroads to carry the coal to his factories. He even bought a fleet of ships.

Remind you of someone? In May, Tesla signed a long-term supply-chain agreement with one of the biggest global nickel producers and is considering investing in Indonesia, the world’s largest single source of nickel. Why nickel? Because it is a major ingredient in the batteries required for long-range electric vehicles.

Vertical supply chain integration involves controlling the key parts of the supply chain by owning, instead of outsourcing, the production or producers of key components. This concept flies in the face of the way we’ve been doing business for decades. But it’s a safe bet, and in a world as volatile as the one we live in, safe rather than cheap is appealing. It’s almost like we’re willing to forgo short-term profit for long-term stability. Covid-19 has changed us all, irrevocably. Or at least for the next 50 years.

But is there a better way? A way to keep costs down and JIT supply up, without placing all eggs in one basket and putting the supply chain under strain it cannot absorb? Perhaps a compromise between Henry Ford, Elon Musk and the way we’ve worked for the last 50 years? Both have their benefits: full control of the supply chain reduces risk in times of volatility, but it’s also more expensive and less efficient.

On the other hand, working with numerous suppliers across the globe keeps prices low and quality high, but exposes manufacturers to risk when the world is in sustained turmoil, as it seems to be now. If there’s one thing we can say about humanity it’s that we forget the past very quickly and tend to overcompensate by going from one extreme to the next.

But I think we may have it, that elusive compromise. Back in 2019 Ford collaborated with the government in establishing the Tshwane Special Economic Zone (SEZ), a public-private partnership that acts as an empowerment and economic upliftment opportunity but also delivers hard-core business value in that it places key suppliers right next to Ford, prioritising parts supply to us — and does it JIT.

Do we own the mines that produce the raw material to produce the parts? No, and my opinion is that we don’t need to. But do we have the suppliers as our neighbours, working with us to build beautiful, high-quality cars at the right price? Yes. Incidentally, we also have a railway line that runs right to our plant and can transport new cars to ports all around the country. That should please our founder.

In Forbes magazine, Jim Witham wrote that one of the most valuable lessons to come out of Covid-19 was that “the relationship between supply chain partners must evolve”. He adds that, “we need to transform the pain of the (Covid-19) experience into new ways of thinking about, and acting on, relationships in our complex global supply chain. How you nurture and respect every partnership within the supply chain makes a difference”.

I completely agree: we don’t need full vertical supply chain integration. We need solid, long-term partnerships with our suppliers. We need to treat them well in the good times as well as the bad. We need to embrace our co-dependency and understand that we need them as much as they need us. Ultimately, that is what will deliver the best products, at the best price, for our customers.

• Smith is customer service director at Ford Motor Company of Southern Africa.